From 24/7 Wall St. · Jake FitzGerald · · 1m 40s
Inherited IRA Rules: 10-Year Clock and 25% Penalty
Inherited IRAs must be emptied within 10 years or face 25% tax penalty if missed.
In brief
Inherited IRAs must be emptied within 10 years or face 25% tax penalty if missed. Nonspouse beneficiaries of IRAs inherited after 2019 must withdraw funds within 10 years or pay 25% excise tax on missed amounts. Originally reported by 24/7 Wall St..
Inherited IRA Clock Starts
Most adult children inherit a parent's IRA without knowing a decade-long countdown begins when the account owner dies.
“you have 10 years to wipe that account clean”
10-Year Rule for Nonspouse Beneficiaries
Nonspouse beneficiaries must empty a traditional IRA within 10 years after the owner's death, facing a 25% excise tax if they miss a withdrawal.
“you have 10 years to wipe that account clean”
RMDs Apply if Owner Started Withdrawals
If the parent began required minimum distributions before death, beneficiaries must withdraw annually for 9 years based on their life expectancy.
“you must continue annual RMDs in years one through nine”
25% Penalty Drops to 10% with Correction
Missing a required distribution triggers a 25% excise tax, which reduces to 10% if corrected within two years by filing Form 5329.
“25% excise tax on the shortfall”
Roth IRAs Get 10-Year Clock Too
Inherited Roth IRAs also require emptying within 10 years, but beneficiaries should leave the account untouched to grow tax-free until final withdrawal.
“leave the Roth alone for the full 10 years”
Exceptions for Stretch Distributions
Surviving spouses, minor children, disabled individuals, chronically ill people, and beneficiaries under 10 years younger than the decedent can stretch IRA withdrawals over their lifetimes.
“five categories of 'eligible designated beneficiaries'”
Three Steps Before Year 10
Confirm if parent started RMDs, model withdrawals against taxable income, and avoid rolling inherited IRAs into your own unless you're the spouse.
“do not roll an inherited IRA into your own IRA unless you are the spouse”
Tax Trap for Inherited IRAs
Inherited IRAs face nine IRS rules that quietly drain retirement accounts, including the 10-year clock and 25% penalty.
“one of nine IRS rules that quietly drain retirement accounts”
The main idea
Nonspouse beneficiaries of IRAs inherited after 2019 must withdraw funds within 10 years or pay 25% excise tax on missed amounts.
